Free Cash Flow (FCF)

Free Cash Flow (FCF) is a measure of a company’s financial performance that represents the cash generated from operations after accounting for capital expenditures needed to maintain or expand its asset base. FCF is a key indicator of a company’s ability to generate cash and fund dividends, debt repayment, and reinvestment without relying on external financing. It is calculated as operating cash flow minus capital expenditures.

Example

A tech company reports $200 million in operating cash flow and $50 million in capital expenditures, resulting in a free cash flow of $150 million, indicating strong cash generation and financial health.

Key points

• Represents cash generated from operations minus capital expenditures.

• Indicates a company’s ability to fund growth, pay dividends, and reduce debt.

• A key metric for assessing financial health and investment potential.

Quick Answers to Curious Questions

Why is free cash flow important for investors?

FCF shows a company’s true cash-generating ability, highlighting its potential to fund growth, pay dividends, and reduce debt without needing external capital.

How does FCF differ from net income?

While net income reflects accounting profits, FCF focuses on actual cash available after necessary investments, offering a clearer picture of financial flexibility.